Social impact bonds yielding 7-12 pct as momentum grows

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ZURICH, Jan 18 (Reuters) - Socially conscious investors could get returns of 7-12 percent from bonds that address chronic societal problems, activists said on Thursday as they sought to attract more private capital into the innovative development tools.

Issued largely by the public sector, dozens of social impact bonds (SIBs) or development impact bonds (DIBs) have raised hundreds of millions of dollars to fund projects such as improving maternal health in Latin America or educating girls in India.

So far, the take-up has been mostly from philanthropists and charitable foundations.

The bonds’ returns, negotiated in advance and often funded by traditional aid donors, hinge on whether projects achieve tangible, pre-defined results. Investors may get nothing back if the projects fail, or a premium if results turn out better than expected.

“Typically, social impact bonds (and) development impact bonds are returning somewhere between 7 to 12 percent. This is a kind of a range that people in the sector feel is reasonable,” Phyllis Costanza, chief executive of the UBS Optimus Foundation, told reporters ahead of a Swiss government conference.

Such returns help philanthropic investment to fund projects that entail some risk, while schemes with the most uncertain outcomes remain dependent on outright grants from donors.

Impact bonds also offer “found money” for philanthropists used to writing cheque after cheque, but who now get returns to circulate into new projects, said Julie Katzman, executive vice president of the Inter-American Development Bank (IADB).

Private investors normally provide upfront funding for such projects that have to hit designated targets, requiring a new mindset and data-collection skills in tracking not just how money gets spent but also how effective the outlay was.

Governments, donors and aid agencies typically provide the funds to repay investors based on success criteria monitored by an independent verifier.

For instance, a Swiss government agency is helping Colombia set up SIBs to bring poor people into the job market. The IADB helps run the $8.6 million programme, for which the Swiss will chip in around $3 million in investor payouts should it succeed.

This kind of approach appeals to social investors, often foundations, looking for ways to diversify their investments while doing good in society, but it also raises ethical questions about profiting from development projects.

UBS Chief Executive Sergio Ermotti, whose bank is the world’s biggest manager of offshore wealth, said clients were increasingly looking to invest in ways that drive sustainable social change.

“They are looking for a professional, transparent and outcomes-focused approach,” he told the conference.

That meant such social investment could help plug what the United Nations estimates is a $2.5 trillion a year shortfall in funding toward achieving its sustainable development goals. (Reporting by Michael Shields; Editing by Toby Chopra)